A sharp fall in metal prices could increase costs; Producers need to hit the margins

The sharp fall in global global prices of base metals from April could hit domestic producers’ margins, following in the footsteps of import-equity prices, but also allow the consumer industries, including auto and white goods manufacturers, to reduce input costs and move towards full profits. Or partly to consumers. However, a fall in the rupee against the US dollar could push up import costs, with some domestic metal companies, especially steelmakers, retaining pricing capabilities.

In the Indian market, after a two-year dream race, metallic stocks are starting to lose steam. Stocks of both ferrous and non-ferrous metals companies have fallen by 25% in the last one month on the BSE, but the prospect of them rallying again in the near future is not very bright as supply exceeds demand across the board. World, including India.

Between March 31 and May 12, the price of aluminum at LME fell by 21%, copper by 10%, zinc by 13% and steel hot-rolled coils (HRC) by 11%. This fall has affected the earnings and market sentiment of Indian companies. In one month till May 12, stocks of Tata Steel fell 15%, JSPL 17%, Hindustan Copper 24%, Hindustan Zinc 19%.

“Demand for metals is strongly linked to the performance of the underlying economy. With rising inflation, central banks around the world are raising interest rates to reduce their economic growth, which is likely to have a negative impact on metals demand in the future,” said Jayant Roy, president and senior group vice president. – Sector rating in Corporate Icra.

Moreover, the sharp rise in metal prices after the outbreak of the Russia-Ukraine crisis could not be absorbed by the market. These factors have led to a correction in metal prices, especially for steel and aluminum, he said.

The decline in metal demand has led to a downturn in China’s economy, the largest consumer and producer of all major metals, due to stricter covid sanctions. The eurozone is also facing the heat of the Russia-Ukraine war and the central bank’s financial austerity measures to control the ever-increasing prices of goods and services. The United States has been battling nearly 40-year high inflation that could prompt the Fed to raise rates further.

Hetal Gandhi, Director, Crisil Research, said, “Prices for both base metals, both global and domestic, have been revised upwards from the March-April peak and the correction in non-ferrous metals has been sharpened.”

On the iron ore side, however, there has been a sharp correction in global prices, especially in Europe and the United States, where domestic prices have been largely resilient for some time. Good export prospects as well as higher input costs, especially domestic prices behind coking coal, witnessed a rally in March and April.

However, domestic steel prices in Europe and the United States also began to fluctuate as global steel prices cooled by 50% and 25%, respectively, from a March high. “Exports to Europe and North America are no longer profitable, domestic mills have revised prices in early May (Rs 2,500 / ton or 3%) and this trend will continue,” Gandhi said.

“The price of steel running on a song for the last two years is finally recovering from the weak season and by the end of the current financial year, there could be a transaction of Rs 60,000 per tonne, which has come down to Rs 76,000 per tonne. It was the highest last month, “Crisil wrote recently.

However, VR Sharma, managing director of Jindal Steel and Power (JSP), said demand and prices for steel were “stable”. As long as input costs are low, steel prices are unlikely to fall, he said, adding that prices could rise next month. JSP’s share price has fallen nearly 17% in the past month.

The domestic aluminum industry is also expecting a stable price for aluminum in LMEs in the near future. “Demand is expected to increase after China lifts the lock-down,” said an executive of a private company, speaking on condition of anonymity.

The resilience of the price of zinc in the face of concerns over demand reflects the strong fundamentals of the metal and the tightness in the refined market which is unlikely to ease in the immediate future, he added. “We don’t expect zinc prices to soften any time soon.”

Consumer industries disagree on whether their input costs will fall and whether these can be passed.

A Maruti spokesperson said: “The current market situation is very volatile and it is too early for us to give any instructions on the impact of the fall in metal prices.” We will analyze the situation and take appropriate action. “

Kamal Nandi, business head and executive vice president of Godrej Appliances, part of Godrej & Boys, said: Segment in April. While companies are absorbing a large portion of the increase in input costs, it has not yet been fully passed on to customers. “

Nandi said that for the current quarter, the fall in the price of non-ferrous metals would reduce the pressure on input costs by only a small amount as prices of all other commodities used to manufacture machinery continued to remain high.

“Metals like copper, aluminum and steel make up a significant portion of the input costs of products such as air conditioners,” said Pradeep Boxi, managing director and CEO of Voltas Ltd. Any movement of these metals will affect our bill of lading and affect the overall cost of air conditioners. We’ve seen prices soften in recent times and this will definitely benefit the industry in terms of lower input costs. “

However, according to Kuldeepak Birmani, Director and Senior Vice-President, Daikin India, although copper prices have fallen globally, it will not benefit Indian air-conditioner manufacturers as all companies import good quality copper from abroad and the cost of imported copper increases. . The rupee has strengthened against the US dollar.

“In fact, to offset rising input costs due to the sharp devaluation of the rupee and the additional costs associated with the new energy label Star Rating from July 1, AC manufacturers will have to go through another phase of price increases in the range of 3-5% in June-July. Forward, ”he said.

For the new Star Rating, the cost to AC manufacturers may increase by an average of 3-5% depending on the model, as the new units will have better efficient compressors and larger components. As compressors are also being imported, their prices have gone up due to the fall in the rupee.

Indian AC manufacturers procure copper from China, Vietnam or Malaysia, while compressors are imported from China and Thailand. “There is a temporary disruption in the supply chain after the Shanghai lockdown due to Kovid,” Birmani said.